Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

How Labor may be displaced from a General Group.—The amount of A´ that can be created depends on the amount of A that can be furnished as material to be transformed into A´, and also on the amount of A´ that will be taken for conversion into A´´. This again depends on the amount of A´´ that will be accepted by employers at A´´´ and sold in this last form to the consuming public. If the market for A´´´ cannot be much increased by a moderate reduction of the price of it, some labor may have to go into the group of B's or C's; and in any case there must be new labor in A, A´´, and A´´´ if the product of A´ is increased. We can now measure the difference between the effect of the adoption of an improvement first by one employer and much later by others, and that of the quick adoption of it by all. In this latter case there is not much delay in increasing the output of the goods, and the market for them does not have time to grow larger because of the growth in the numbers and the wealth of the community. Unless the present market will take an enlarged quantity of the finished goods without requiring that the price should go below the new cost of making them, some labor will have to leave the general group.

How Patents may Cause an Increased Displacement of Laborers.—What we often see is the nearly simultaneous adoption of a labor-saving device by all leading employers in one industry. Something like this takes place when the makers of a valuable machine retain the patent on it in their own hands, and press the sale of it on all the producers who have use for it. In this case, however, the makers usually put the price of the machine at a figure that, while it affords an inducement to buy it, does not reduce the cost of the goods that it helps to make enough to cause a great increase in the demand for them. The owners of the patent on the new appliance charge for it "what the traffic will bear"; and until the patent runs out, the users of the machine have to sell their goods almost at as high prices as before. If the machine enables one man to do the work of a dozen, eleven men must find other things to do. They could find them in their own industry if the product of it were enlarged in consequence of the use of the machine; but if the high price of the patented machine prevents this, they must go elsewhere. When the patent runs out, there is likely to be a considerable enlargement of the industry, and how important this fact is we shall soon see.

How Improvements which call Labor to a Particular Establishment may displace Labor from a Group.—Another typical case is afforded when some one employer has for a time the exclusive use of a labor-saving device, and pushes his production to the utmost in order to get the full benefit from it. Here are seen the more characteristic effects of such an improvement. It draws labor to the employer who for the time being monopolizes the new instrument of production, but it turns labor from the subgroup of which this employer is a member. He enlarges his output and in time this reduces the price of the product. In the field there are marginal mills, or those so antiquated, ill situated, or badly run that, with their product selling at the former price, they could barely hold their own; and now that the price is reduced, they lose money by running. They have to cease operating, and this makes practicable a further enlargement of the product of the efficient mill. Much labor goes thither, but some part of that which leaves the abandoned mills betakes itself to other subgroups. Not often, indeed, does it have to go to other general groups. The cheap transformation of the material A into A´ enlarges the market for A´ and calls for more labor at A, and it involves more at A´´ and A´´´. If the change of method had been gradual, the growth of the social demand for A´´´ would probably have precluded the need of sending any labor out of the entire group of A's. Even a rapid change often sends labor out of one subgroup into other subgroups of that series rather than into other general groups.

An improvement that should reduce the cost of converting leather into shoes would, by the sale of the shoes, call for more leather, more cattle, more appliances, more tanning, and larger buildings for shoe factories, furnished with more shoemaking machinery and greater motive power, even though the particular machines which were improved by the invention had become so much more efficient that no more of them were needed. This depends on the extent to which a certain reduction of cost of a product enlarges the market for it.

Principles Governing the Enlargement of the Effectual Demand for One Commodity.—In determining how much a reduction of the price of a single article will at once enlarge the market for it, there are two things to be considered, namely, the elasticity of the want itself to which the article caters, and the extent to which an article catering to a particular want may be substituted for other articles designed to satisfy the same one. The desire for jewels and other articles of personal adornment is very expansive, and a fall in the price of any one article of this kind causes a relatively large increase in the consumption of it. Since the want to which a costly ornament caters is thus elastic, the cheapening of all articles that cater to this want would enlarge the consumption of all of them. The cheapening of a particular one of these articles, if there were in the market many others of the same general kind, would cause that one to be extensively used in preference to the others. By an enlargement of the total amount of decorative articles used and by a relative favoring of a particular one of them at the cost of others, the sale of that one would be doubly increased. Cheaper diamonds might mean an increased use of them without any large reduction in the use of other gems; but if many other gems happened to be available for the purposes subserved by the diamonds the use of these others would be curtailed and that of diamonds would be disproportionately increased.

The Value of Goods as affected by the Existence of Castes.—One of the reasons why the market for jewels is thus elastic is the fact that they serve as badges of caste, as only something of large cost can do. If, therefore, all gems were to become much cheaper, two things would happen: (1) relatively poor people would buy some of them—partly in lieu of imitations and of cheaper real jewels; and (2) rich people would have to buy more and costlier ones than were formerly needed, in order to retain their positions in the social gradations. This principle affects the consumption of a wide range of articles, the possession of which seems, outwardly at least, to stamp the owners as belonging in a certain stratum of society. It increases the demand for fine clothing, furnishings, and equipage, multiplies social functions, and induces participation in all manner of costly diversions. The elasticity of the market for luxurious goods is, in general, greatly increased by the action of this motive. The cheapening of them causes them to be consumed by the lower classes and renders the use of greater quantities or higher qualities of them a social necessity for the higher classes.[1]

We shall soon see that a reduction in the cost of any one article usually causes the use of it to trench on that of all manner of things which are on the margin of consumption and are not similarly cheapened.

Changes of Cost of Different Goods Never Uniform.—The cost of all articles is never reduced at the same time, and it is impossible that all of them should remain in the same order of desirability in the estimation of purchasers. Many things, however, are often cheapened at the same time, though in different degrees. Whatever furnishes a very common raw material at a lower cost than has prevailed, as did the invention of the Bessemer process of steel making, makes everything into which that material enters cheaper. By reducing the cost of railroads and engines, cars and steamships, the Bessemer process indirectly lowered the prices of goods that have to be carried, which means practically everything. A cheap motive power acts in the same way and lowers the costs of producing an unlimited number of goods. Even in the case of such general improvements as this the reductions of price are not uniform. Some goods are affected more than others. Cheap steel lessens the cost of bridges more than it does that of dwelling houses, and in the case of many improvements the effect is confined to a limited class of products, if not to a single one.

How the Disturbing Effect of a Single Improvement is Limited.—In the case of consumers' goods improvements are going on so nearly incessantly and at so many points that the effect is much the same as if every invention cheapened most of them at once. Harmful disturbances are reduced to minute dimensions by the multiplying of the changes, each of which, if it occurred alone, would produce a hurtful effect. Many inventions cancel one another's unfavorable effects in a way that we shall later examine. What we now have to do is to isolate a single productive change and see whether there are forces working to reduce its own independent power to create incidental disturbance. What limits the power of a single new and economical process to eject laborers from their accustomed places of employment? This question cannot here be answered in detail, but a brief statement will cover the general principles involved. Obviously the displacement varies inversely with the extent to which increased cheapness enlarges the consumption of the article affected. If by making one thousand men produce as much of the commodity as two thousand formerly produced, you so reduce costs as to double the consumption of the article, you keep all the men who formerly made it in their accustomed places of employment. The elasticity of the want itself to which the article caters is one of the two elements that determine the increase in the consumption of it; but when this increase is due to an extensive substitution of this article for others in the purchasing lists of the consuming public, the result is greatly to reduce the displacement of labor which the new and economical method of production entails. Such substitutions are very general and are a large factor in rescuing men from the hardship of being forced out of the employments they are used to.

On what an Enlarging Market for Tools and Raw Materials Depends.—The market for raw materials and tools depends on that for consumers' goods in their completed state. If A, the raw material, enters only into A´´´, it can be sold in increasing quantities only as A´´´ is thus sold. The chief fact about tools and materials is that they may contribute to a large number of completed goods, and the significance of this fact we shall soon see. The ultimate power to find a market for all products of the lower subgroups depends on finding one for the products of the uppermost ones—the A´´´, B´´´, and C´´´ of our table. The laws which govern the market for finished goods of declining cost have first to be studied.